Wednesday, September 1, 2010

The August ISM manufacturing index came in quite a bit stronger than expected, refuting some recent and scattered signs of a slowdown in activity. Indeed, this index (above) strongly suggests that the relatively tepid GDP growth in Q2 was an anomaly, and that we should see stronger growth in the second half of the year.

The export orders index slipped marginally, but remains comfortably above 50, suggesting ongoing expansion in that sector of the economy.

The prices paid index moved a bit higher, reflecting, as it has for quite some time, a gradual buildup of inflation pressure that is undoubtedly being driven by rising commodity prices. It also continues to signal that deflation is nowhere to be seen.

The strongest part of the report was the employment index, which has reached a level that was last seen at the end of 1983, when the economy was embarked on the Reagan boom. This also counters the relatively weak ADP employment number released today.

The bears will have to go through contortions to explain away the across-the-board good news from this report.

"A second effect of more new money being channeled into asset prices is, as hinted above, that it results in the traditional range of stock valuations moving to a higher level. For example, the ratio of stock prices to stock earnings (P/E ratio) now averages about 20, whereas it used to average 10–15. It now bottoms out at a level of 12–16 instead of the historical 5. A similar elevated state applies to Tobin's Q, a measure of the market value of a company's stock relative to its book value. But the change in relative flow of new money to asset prices in recent years is perhaps best seen in the chart below, which shows the stunning increase in total stock-market capitalization as a percentage of GDP (figure 1).

The changes in these valuation indicators I have shown above reveal that the fundamental links between company earnings and their stock-market valuation can be altered merely by money flows originating from the central bank."

The short-term fixes will always create longer-term disasters. The current 'strength' is merely the effect of Federal Reserve dollar printing. Lap it up as quickly as you can and adjust when the bottom falls out in the future.

I think the statist nightmare first grabbed the collective consciousness in late 2008 and early 2009, and that was a key factor pushing the equity market down to its early March lows. Bush got things started, and Obama, Reid and Pelosi delivered the coup de grace.

The Fed's job is to make sure that the economy has enough money to satisfy the demand for money, but not too much since that would be inflationary. The Fed's job is NOT to make the economy grow. The only way the Fed can promote growth is by following a responsible monetary policy that delivers low and stable inflation.

Can you name a modern economy that prospered under zero inflation? What about Japan?

On the other hand, most of the world's economies have prospered in the last 30 years, with mild inflation. People globally are much better off than before, and even in the USA (some disputes about whther the lower classes got ahead....).

China's and India's economies are booming right now, and have some inflation.

It may even be that what we call "inflation" in inevitable in a prospering econmy. Why?Consider it. The most choice houses and properties will get bid up in prosperous times, as real per capita incomes rise.

There are so many houses by the beach--as we become richer, those properties skyrocket in price. All choice housing does the same. Builders can build more, but usually the supply of choice stuff is limited by location.

That is viewed as "inflation" when the BLS comes around, but it really reflects higher living standards.

Tobin's Q originated in 1969 was relevant to US GDP when exports were only 5% of GDP...today exportsare almost 13% of GDP and more importantly about 35 to 40% of sales in the S&P 500 are foreign based....with regard to the S&P 500Global GDP has a much better correlation than US GDP

You are taking such a narrow view (50 - 75 years), its hardly relevant to a meaningful discussion of economies over time.

The dollar has depreciated 95% since the invention of the Federal Reserve. An economy does not need more money in circulation to increase the productive capacity of the economy. Inflation benefits those closest to the source (banks) and hurts those furthest away (consumers).

The benefits of efficiency and becoming more productive should translate into lower prices for food, housing, etc.

Your analogy of housing is incorrect. Prices can only rise so much as people are willing to employ their excess capital. Once this capital is fully vested, prices can longer increase unless there is artificial money supply added to the system. Otherwise prices would plateau or drop accordingly.

that is the point about inflation and money printing. Prices would adjust in a free and open market where interventions did not occur. It is incorrect to assume corporations could not/would not prosper and profit in this environment.

Japan is not an appropriate analogy just because they have mild disinflation. there interventions and tinkering are enormous in scale.

Well, that is the first time I have been accused of taking a "narrow view" of 50 to 75 years.

I am usually chastised as an "old fogie" as I try to get family members to look out 10 and 20 years.

Okay, I am limited by an outlook of 50 to 75 years.

PL, maybe in a perfect world, you would be right (although jeez, what is zero inflation when the mix of goods and services evolves so rapidly? Health care? Computers? Cell phones? Online stock trading?

Rather than obsess about inflation, we should promote bona fide and healthy economic growth.

Now you are talking. We do not need money printing to create real wealth. We need to remove the barriers and disincentives to invest outside of financial assets.

There should be way more reward per unit of risk to build a real company rather than bet on one. Sadly the table is massively skewed the other way. It is far more complex and costly to build from scratch than it is to toss your money around in a faux stock market using leverage on money printed out of thin air.

COUNTRY MUSIC?? Tax COUNTRY MUSIC?? My heavens! You are suggesting RIOTS in Nashville! STREET MARCHES in Branson! And BAMA JAM down in Enterprise would become a mass PROTEST site instead of a weekend of country's answer to WOODSTOCK. There's not a politician in Dixie that could get reelected supporting a TAX on COUNTRY. fugeddaboutit. :)